In their trading on Forex, the term 'Drawdown' will be used by all traders. Although some novice traders may still not know what it really means. This article provides an overview of what Drawdown means in Forex trading.
Drawdown Understanding
A drawdown or drawdown is a accumulated loss in a trader's portfolio, represented as a percentage (%) of the initial capital or Balance that will depend on reflecting the level of risk acceptable to investors. Generally, pedagans will use Drawdown no more than 30% and are considered a safe limit with portfolio recovery potential.
It exceeds these limits signaling an increased danger and risk of losing or running out of the portfolio completely.
Example 1: A trader with a capital of $10,000 suffered a loss of $2,000. Production is at 20% of the investment portfolio, implying a safe range for recovery and continued trading.
Example 2: A trader with the same capital suffered a loss of $4,000. Withdrawals reach 40% of the portfolio, indicating a high-risk scenario that could result in large losses and portfolio extinction if trading continues.
Cause
1. Lack of Knowledge and Absence of a Trading Plan
One of the reasons for the drawdown is that traders will trade in Forex without sufficient expertise in gragf analysis or may not understand the indicators more.
2. Inefficient Money Management
Effective money management is essential for traders. The lack of such a skill can lead to an increase in it and increase the risk of substantive losses.
Types of Drawndown
It is usually classified into three types, each of which has its own unique features and implications:
1. Maximal Drawdown (Max DD)
It represents the largest continuous loss by calculated from the peak of the highest profit to the lowest loss point. The max DD value helps in evaluating the performance of the EA (Expert Advisor). Values below 20% are considered good, while values above 20% require careful monitoring and adjustment through appropriate Stop Loss actions.
2. Relative Drawdown (RDD)
It represents the highest continuous loss compared to Balance at a certain point. RDD values can be used to measure the ability to survive consecutive defeats.
3. Absolute Drawdown
This is the biggest loss since the trader started trading. Can Absolute Drawdown can be used as an indication that the investment funds available at that time will be able to support the trading system. Or how well the tools are used and whether the available funds can be used until the profit is made is mugkin.
Benefits
- Potential risk warning
- Financial planning guidance
Conclusion
This article illustrates that the value of Drawdown is very useful in trading because it helps us assess the risk level of the portfolio and plan successful trades. However, traders should avoid emotional trading and consistently study additional information.
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